The Bank of England (BoE) has made a noteworthy move. On August 3rd, the BoE raised the base rate by 0.25 percentage points, marking the fourteenth such increase since December 2021.
At the heart of this decision lies the BoE’s commitment to address the mounting inflation, which has cast a shadow over our financial stability. This inflation, which has soared to a staggering 7.9%, is projected to taper down to 5% by the close of 2023.
However, this trend isn’t confined to the UK alone. The US Federal Reserve recently scaled up interest rates to a level unseen in over two decades.
Delving deeper, we seek to elucidate the implications of this rate hike for your financial affairs.
Impact on Mortgages
Regrettably, this rate hike brings with it the inevitability of an increase in mortgage costs. The timing of this escalation depends on the kind of mortgage in your portfolio.
For holders of variable rate mortgages, such as trackers, the rate adjustment is likely to be immediate. Similarly, standard variable rates (SVR) are anticipated to follow suit and experience a bump post a base rate increase.
Unsurprisingly, two-year fixed-rate mortgages have recently reached heights not witnessed in the past 15 years, an outcome attributed to the prevailing inflation and the ambiguity surrounding the trajectory of interest rates.
Yet, there’s a glimmer of optimism on the horizon. The base rate is anticipated to reach 5.75% by year-end, an anticipated moderation from the current level of over 6%. This trajectory is expected to translate into a gradual decrease in mortgage rates.
Should you be approaching the expiration of your fixed-rate deal, there is still a likelihood of increased costs during remortgaging. However, these rates are expected to be more favourable compared to earlier this year. Notably, Laith Khalaf, Head of Investment Analysis at AJ Bell, points out that fixed mortgage rates can decrease even as the main bank rate experiences an ascent.
Additionally, a related development highlights a 3.8% dip in UK house prices for July, registering the fastest annual decline in 14 years, according to Nationwide. For those considering homeownership or a remortgage, it is prudent to engage with a seasoned financial adviser to navigate these fluctuations.
Savings and Their Prospects
Savers have experienced a silver lining with the ascending interest rates, with premier fixed-rate accounts now offering approximately 6% returns on a year’s deposit. However, it is essential to acknowledge that this still falls short of countering inflation.
Nonetheless, this era of fruitful savings rates could be approaching its zenith. The projected dip in the base rate later this year might prompt the withdrawal of these lucrative offers from the market.
In light of this, those who have the capacity to commit should consider securing a fixed rate now to capitalize on the prevailing generosity. As Laura Suter, Head of Personal Finance at AJ Bell, points out, this window may soon close as rates are poised to recede further.
When evaluating options for a prime savings account, prudent shopping around is advised. Furthermore, for those entertaining the thought of a fixed-rate account, it is prudent to ensure that access to the funds isn’t required before the stipulated term ends.
What might happen next?
Insights from experts indicate that interest rates might culminate at 5.75% by the conclusion of this year, marking a decline from their current level of over 6%. However, market dynamics are inherently unpredictable. At present, the market prognosticates one or two additional base rate hikes, yet this projection could be influenced by inflation’s behaviour.
In times of financial uncertainty or when faced with consequential decisions, seeking guidance from an independent financial adviser duly regulated by the Financial Conduct Authority (FCA), can offer invaluable insights.
